Morgan Stanley predicts buy-to-rent boom

The buy-to-rent market is only a fraction of what it could be, according to a research report from Morgan Stanley. And, the investment banks sees four possible ways to get in on the action.

"We believe today’s ~$17B institutional BTR industry can continue growing and perhaps reach over $100B over the next several years," said the latest Morgan Stanley (MS) housing research report.

The analysts called the market a "sustainable business with a long runway for growth," due to several factors.

For one, demand for homeownership is dropping and expected to continue. This will drive up rents. In fact, institutional investors could rightfully anticipate a greater than 10% return on investments. And while the distressed inventory is low, it is sizable enough to meet investor demand.

"Over the past three years, investor activity has removed significant amounts of distressed supply from Southern California, Phoenix and Las Vegas," the report states. "Consequently, select MSAs in Florida, the Midwest and the Northeast now constitute a greater proportion of the nation’s distressed properties, making them potentially more attractive to institutional buy-to-rent investors."

The analysts suggest four different ways investors can get involved.

The easiest way is to invest in a single-family real estate investment trust. Another way is through home rehab company investments, but Morgan Stanley indicates this strategy will likely be less successful.

The third strategy is to invest in mortgage lenders. BTR lifts home prices and increases resi transaction activity," they write. "That cleans out delinquent loans, drives down expenses and boosts home prices," a positive for Bank of America (BAC), SunTrust (STI) and TCF Bank (TCB).

The fourth option is to invest in non-agency mortgage bonds with front-pay tranches that benefit from an institutional investor base. This puts in a backstop to liquidation losses that would increase the risk on the bonds.

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Commentary

The marketplace is full of hard and private money lenders — it will come down to who can best assist investors in completing their goals, whether that be by providing quicker close times, or with more accurate valuations. With how many options there are for borrowers, lenders will need to start competing for marketshare as borrowers shop their situations to multiple lenders, leveraging the offers against each other. This process will force lenders to update their guidelines, or be forced out of the market.